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What to Expect from the “New” SEC

What is in store at the SEC under new leadership? Jay Clayton was sworn in as the 32nd Chairman of the SEC on May 4. Since then, he has been hiring senior staff and providing glimpses into what his regulatory and enforcement agenda will be. Ropes & Gray’s Jeremiah Williams and David Tittsworth discuss the “new” SEC and how Chairman Clayton’s agenda may be shaped by outside interest groups, Congress, and the White House.

Jeremiah: Welcome to our podcast on what to expect from the “new” SEC. My name is Jeremiah Williams. I am a counsel in Ropes & Gray’s Business & Securities Litigation practice group. Before joining Ropes & Gray’s D.C. office last year, I served as Senior Counsel in the Division of Enforcement at the SEC in its Asset Management Unit. I am joined today by my fellow counsel here in our Washington office David Tittsworth. Before joining Ropes two years ago, David served as President and CEO of the Investment Adviser Association for 18 years. Before that, he worked in various positions on Capitol Hill, including as counsel to the House Energy and Commerce Committee. Today, we will provide an update about the SEC. David, let’s start with what’s happened at the SEC in the last few weeks.

David: Well, Jeremiah, the really big news is that Jay Clayton was sworn in as SEC Chairman on May 4, thus becoming the 32nd SEC Chairman and his term will run until 2021. He has a very distinguished background as a partner at Sullivan & Cromwell for over two decades, and Clayton will join two other Commissioners, Republican Mike Piwowar who was sworn in in 2013, his term will expire next summer, and Democrat Kara Stein who also was sworn in in 2013 and her term actually expired last month. Piwowar and Stein are both former Senate staffers but they’re pretty much polar opposites when it comes to policy issues.

Jeremiah: David, what about the other two open seats at the SEC?

David: Well, you’re right. The SEC is designed to have five commissioners. The President has the authority to nominate two additional commissioners. He could also nominate a replacement for Kara Stein. The usual protocol would be to nominate one Republican, one Democrat. Any commissioner nomination must be confirmed by the United States Senate. Last week, the White House announced that President Trump intends to nominate Hester Peirce as a Republican commissioner, but it’s not certain right now whether a Democrat is going to be nominated which could make it more difficult to receive Senate confirmation of Peirce alone. So for the time being, we will just have three SEC commissioners.

Jeremiah: Perhaps this may seem like a basic question, but why is the SEC chairmanship so important?

David: Well it’s a good question. The Chair hires all the key staff, serves on the Financial Stability Oversight Council, runs the day-to-day operations with 4,600 employees, serves as the main contact with Capitol Hill and the White House, but most important, Jeremiah, the Chairman sets the agenda for the agency. He or she has the power of the gavel to decide what issues are going to be considered and which will not.

Jeremiah: David, what observations do you have about Clayton’s potential regulatory agenda for the asset management industry?

David: Well, this is a work in progress. He’s obviously developing thoughts about any asset management regulatory agenda. He’s in the process of hiring key staff who will have the responsibility for drafting and implementing any new regulations. His first public speech was on July 12th at the Economic Club in New York and at the outset he explicitly stated that wholesale changes to the Commission’s fundamental regulatory approach would not make sense. So he’s basically said I’m going to continue that the SEC’s in decent speech, but he did set out several key principles that he intends to follow. He talked about regulatory actions and how those can drive change and suggested steps that should be taken to reverse the decline in the number of publicly-traded companies. He said the SEC has to evolve, use technology and innovation in ways that are going to improve regulatory efficiencies. He said the SEC needs to look beyond just mere rule adoption and said it should review its rules retrospectively to make sure they’re working as intended. He said the SEC needs to coordinate with other regulatory players including the CFTC on derivatives issues. The one thing he’s done that is fairly concrete is on June 1st he issued a request for information asking for comments on potential rules governing fiduciary obligations.

David: Well, they’re doing a lot. They’re doing what they’re supposed to be doing. Groups representing mutual funds, mutual fund directors, investment advisers, hedge funds, PE firms, they’ve all met with Clayton and they’re proposing numerous regulatory proposals. So it’s beyond the scope. We could spend a lot of time going into all this, but let me give you a couple of examples. The ICI, for example, has expressed support for a properly tailored derivatives rule. They’ve also suggested revisions to the liquidity rule that was adopted last year. The Investment Adviser Association has expressed support for a retrospective review of investment adviser rules. The Managed Funds Association representing hedge funds has asked the SEC to ensure data security and treatment of confidential information. The American Investment Council, which represents PE firms, has asked the SEC to abandon the Business Continuity Transition Planning rule that was proposed last year and also to revise the current Pay-to-Play rule. So again, there’s not time today to outline all the proposed changes but the bottom line is that lots of groups are trying to influence Clayton’s agenda.

Jeremiah: What influence will the Trump administration have on the SEC?

David: Well, the President has issued a bunch of executive orders that are clearly de-regulatory. The SEC is an independent regulatory agency so it’s really not technically bound to follow presidential directives or executive orders, but I think it would be foolish to think that the presidential nominees are just going to ignore these executive orders. So the thing to watch – February 3rd executive order requires the Department of Treasury to issue a very broad report on financial services. The first one of those reports on banks and credit unions, including the Volcker rule, came out in June. The next thing for us to watch is a report from Treasury on asset management and insurance issues. We know that groups and asset management firms have been meeting with Treasury officials and it’s possible that that Treasury report could affect the SEC’s regulatory agenda. We expect to see that report sometime after Labor Day, probably late September.

Jeremiah: What are the prospects for potential legislation on Capitol Hill that would affect the SEC’s regulatory agenda?

David: Well in June, the House passed the so-called Financial Choice Act, a strict party-line vote. Essentially, this is the anti-Dodd-Frank Act. It would repeal the Volcker rule, the private equity registration requirements, FSOC’s authority to designate nonbank SIFIs, the DOL fiduciary rule, and on and on and on and on. There’s virtually no chance that the Senate is going to do anything similar. It is possible at some point that incremental legislation could gain bi-partisan momentum in the Senate where 60 votes are required to get to a vote, but the bottom line is absent some external, unexpected event, I think it’s highly unlikely that Congress will enact significant asset management legislation anytime soon. So Jeremiah let me switch roles, ask you a couple of questions. You’re a veteran of the SEC’s Enforcement Division and Asset Management Unit, what is your assessment of Chairman Clayton’s views on enforcement issues?

Jeremiah: Clayton has a very different background from Mary Jo White who is a former prosecutor. Clayton we expect to be more focused on capital formation, but he has clearly stated his support to continue a strong and active enforcement program. His proposed 2018 budget will continue to devote 50% of the SEC’s resources toward enforcement. He made two appointments – Stephen Peikin and Stephanie Avakian as co-directors of the Division of Enforcement. He appears to support a continuation of a robust enforcement program rather than a significant departure. Many believe Clayton will depart from Mary Jo White’s dated “broken windows” policy, but it will take time to see as many cases are in the pipeline and it would be unwise to assume that there will be a dramatic change overnight.

David: And what about Mr. Clayton’s views on inspection activities?

Jeremiah: Clayton has expressed strong support for an effective inspection program. With respect to investment adviser examinations, Clayton has noted that the number of investment adviser investment company examinations will increase by about 20% in 2017. This is due to shifting a hundred broker-dealer examiners to the investment adviser inspection program. Also, we expect to see an additional 5% in 2018. So David to wrap things up, can you summarize what we might expect to see in the future?

David: Well it’s a moving target, but I don’t think anyone should expect some immediate, dramatic rollback of SEC regulations. Asset managers and other regulated entities need to continue to pay attention to their legal, regulatory and compliance obligations, and we certainly will be paying close attention as Chairman Clayton’s regulatory agenda takes shape in the coming weeks and months.

Jeremiah: Well that’s all the time we have today. Thanks for listening and thanks David for your insights. Until next time, please visit our Capital Insights page on our website www.ropesgray.com for more news and analysis on noteworthy issues here in Washington D.C.

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